I am a Tax Partner in WithumSmith+Brown’s National Tax Service Group and the founding father of the firm's Aspen, Colorado office. I am a CPA licensed in Colorado and New Jersey, and hold a Masters in Taxation from the University of Denver. My specialty is corporate and partnership taxation, with an emphasis on complex mergers and acquisitions structuring. In the past year, I co-authored CCH's "CCH Expert Treatise Library: Corporations Filing Consolidated Returns," was awarded the Tax Adviser's "Best Article Award" for a piece titled "S Corporation Shareholder Compensation: How Much is Enough?" and was named to the CPA Practice Advisor's "40 Under 40."

In my free time, I enjoy driving around in a van with my dog Maci, solving mysteries. I have been known to finish the New York Times Sunday crossword puzzle in less than 7 minutes, only to go back and do it again using only synonyms. I invented wool, but am so modest I allow sheep to take the credit. Dabbling in the culinary arts, I have won every Chili Cook-Off I ever entered, and several I haven’t. Lastly, and perhaps most notably, I once sang the national anthem at a World Series baseball game, though I was not in the vicinity of the microphone at the time.

The NFL Is Back: The Tax Consequences Of Sports Gambling

CHARLOTTE, NC - SEPTEMBER 01: Teammates Jonathan Stewart #28 Cam Newton #1 and Jeremy Shockey #80 of the Carolina Panthers celebrate after Newton's pass for a touchdown to Shockey against the Pittsburgh Steelers during their preseason game at Bank of America Stadium on September 1, 2011 in Charlotte, North Carolina. (Image credit: Getty Images via @daylife)

If you were one of the unfortunate suckers who had some cash on the Carolina Panthers +4 this afternoon, you’ve already learned that picking winners in the NFL ain’t easy. (Curse you, DeAngelo Williams!) I’m willing to bet, however, that you’ve never taken the time to learn the tax consequences of your gambling activities. So how’s about a little Q&A?

Q: Wait…there’s “tax consequences” to betting on sports?

A: Yes. Yes there are. First things first, all gambling winnings are included in taxable income by virtue of Section 61. So on the off chance that you win it all back tomorrow night on the WashingtonRedskins Racially Sensitive Equivalents, you are required to report the income to the IRS. A recreational gambler — i.e., anyone that isn’t a “professional” (more on that later) – must report his or her gambling winnings on Line 21: Other income.

Q: I did not know that. But here’s the thing…I’m not so good at gambling. While I might guess right on occasion, I lose a lot more than I win. What do I do with the losses?

A: Gambling losses are deductible, subject to a few caveats. Unless you’re a professional, your losses are only deductible as “other miscellaneous itemized deductions” on Schedule A. This is generally bad. It’s bad because if your itemized deductions don’t exceed the standard deduction ($12,200 for married taxpayers in 2013), then you won’t get any tax benefit from all of those absurd, loser parlays.

Next, you may only deduct losses to the extent of your winnings; you cannot generate a net loss from your gambling activities. This, once again, is bad.

There is some good news, however. Unlike most “other miscellaneous itemized deductions,” gambling losses are not subject to the 2% of adjusted gross income floor. In addition, gambling losses are not subject to the recently-resuscitated PEASE limitation, which generally causes a taxpayer to lose 3% of itemized deductions for every dollar adjusted gross income exceeds $300,000 ($250,000 if single).

Q: My sports betting hobby is not of the, uh…”legal” variety. I prefer to invest locally, by which I mean I place my bests with Vito down at the pizza shop. I can’t claim illegal winnings, can I? I mean, Vito isn’t exactly in the habit of handing out W-2Gs.

A: You greatly underestimate the desire of the IRS to get its hands on your cash. It is a well settled point of tax law that all income – whether legal or illegal – is included in taxable income unless specifically excluded by statute. So yes, if Vito owes you at the end of the year, you must report the income.

Q: Fair enough, but how do I prove the losses I’m entitled to?

A: That’s the rub. Your losses are going to be disallowed unless you can substantiate them. In general, the IRS requires that you keep an accurate diary or similar record of your losses. Your diary should contain at least the following information:

1. The date and type of your specific wager or wagering activity.

2. The name and address or locations of the gambling establishment (note: Vito will not like this).

3. The names of other persons present with you at the gambling establishment.

4. The amounts you won or lost.

Q: Suppose I ditch Vito and start gambling through an online, offshore account. I don’t have to include any income earned in that account, since it wasn’t earned in the U.S., do I?

A: First off, congratulations on bidding farewell to euphemism-filled phone calls, shady backroom payouts, and the constant threat of broken thumbs. Your understanding, however, is incorrect. A U.S. citizen or resident pays tax on all of his or her earnings, whether earned domestically or abroad. If you think your offshore gambling winnings aren’t taxed in the U.S. until you bring the money back to your U.S. bank account, then you are confusing your gambling account with a separate foreign corporation, the income of which would generally not be taxed to the U.S. owner until it was repatriated. An offshore, online gambling account does not meet that standard; is essentially just an extension of you, and so it doesn’t matter that the winnings are held by a Costa Rican website, it’s still taxable income.

There’s one other advantage to joining the digital age: it’s going to be much easier to substantiate your losses, since everything should be recorded in your online account. So you’ve got that going for you, which is nice.

Q: But what if I leave my winnings in the account and don’t withdrawal them. Then I can avoid tax, right?

A: It must get exhausting being wrong all of the time. See, the tax law has a little judicial doctrine called “constructive receipt.” Basically, whenever income is set aside for your account, meaning you could take the cash if you so desired, the income is taxable to you at that moment, even if you opt not to withdrawal it. Certain accounts (think, your 401(k)) are afforded special treatment whereby the owner isn’t taxed until the money is withdrawn, but an online gambling account doesn’t receive that same preferential treatment. So if you win $20,000 in your online account in 2013 but you choose not to take it out until January 1, 2014, the winnings are still taxable in 2013.

Q: I’m considering quitting my gig at the cracker factory and trying to earn a living betting on football. Will I then be considered to be a professional gambler? And if so, why do I care?

A: Let me start by saying that your desperation saddens me. Next, let me answer your question with a question. Would your gambling activity be pursued full time, in good faith, and with regularity, with the goal of producing income as a livelihood? If so, you’ve got a fighting chance, because the Supreme Court has held that a taxpayer can be in the trade or business of being a gambler. (See Groetzinger)

If you are indeed a professional, you must report your income and losses on Schedule C. Aside from your losses, you can deduct other expenses essential to a gambling activity, such as handicapping magazines, research material, and blue cheese dressing.

/last item may not be accurate

But here’s the kick in the pants: even if you are a professional gambler, you can’t deduct a net loss from your Schedule C activity. It sounds strange, but even if your expenses and losses exceed your gambling winnings, the courts have held that Section 165(d) – which limits losses from wagering transactions to the extent of wagering income – trumps Section 162, which allows a deduction for all ordinary and necessary expenses of conducting a trade or business. (See Crawford) As a result, if a professional gambler has $30,000 of winnings and $45,000 of losses, he may only deduct $30,000 of the losses, reducing the net income to zero. This is a unique result in the tax world; in fact, one would be hard pressed to find many more types of trade or businesses in which a taxpayer is not entitled to deduct a net loss.

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